Tax Deductions: Should I Take the Standard Deduction or Itemize?

As you receive and gather those tax documents—W-2s, 1099s, and such—and as you start putting those receipts in order ahead of the tax filing deadline (you are doing this now, right?), it may also be time to think about deductions.

One of the biggest decisions taxpayers face is whether to take the standard deduction or go the itemized deductions route. That decision may be even bigger after the tax code changes that Congress passed in 2017, which made significant changes in tax brackets and raised the standard deduction.

Most Changes Happen Next Year

The new tax law was passed in 2017; true. However, Ron Mackail, president of Mackail & Sterling PA, a tax management and financial planning firm in North Palm Beach, Florida, says those changes will affect 2018 returns—meaning returns that are filed next year. For 2017 returns, which you’ll file in April, taxpayers are still operating under the previous rules regarding deductions.

For 2017 returns, if you’re a single taxpayer or married filing separately, the standard deduction is $6,350, while for people who file as head of household it’s $9,350. For married people who file jointly, or for qualified widows, the exemption for 2017 is still $12,700.

For this year’s returns, you can still deduct state and local income or sales taxes, real estate taxes, personal property taxes, mortgage interest, and disaster losses. Consider itemizing if you had large unreimbursed medical bills, had a large, unreimbursed theft, or if you were particularly generous to charities in 2017.

So how do you know if you should take the standard deduction or itemize deductions? Mackail says to start by creating an itemized deductions worksheet. If you have 2016’s returns handy (and you should get those out anyway), Mackail says to take a look at the Schedule A to identify what you did for last year’s returns.

“In my practice we always put in the itemized deductions into the tax software to see what is greater,” he says. “The 2017 returns will be normal; it’s 2018 when people will have questions.”

What to Expect Next Year

For 2018 returns, the single/married filing separately standard deduction jumps to $12,000, while head of household will be $18,000. Married filing jointly will be $24,000.

In addition to the jump in standard deductions, the new tax law also limits how much homeowners can deduct for mortgage interest and real estate taxes. There's a $10,000 combined total deduction limit for income, state, and property taxes. Also, taxpayers can deduct the interest on up to $750,000 of mortgage debt. That's down from the previous cap of $1 million.

These key changes may make it trickier for some people to gather enough deductions to itemize for 2018’s returns.

If you can still itemize deductions, the charitable deduction remains for taxpayers, Mackail says. Under the new law, the deduction is limited to 60% of the taxpayer’s adjusted gross income for cash and gifts. However, he says, the taxpayer will receive the benefit of carrying that deduction forward for up to five years.

“Say someone donated $20,000, but was limited to [deducting] $15,000. The $5,000 is carried forward. But the time frame is only up to five years to carry it forward,” he says.

In order to itemize in 2018, the taxpayer has to exceed the standard deduction under their current filing status—married filing jointly or qualifying widow, single, head of household or married filing separate.

What about saving deductions and itemizing every other year? That doesn’t work with mortgages, unfortunately. Mackail says the deductible interest paid on the mortgage is filed to the IRS, and mortgage lenders are legally responsible to report the interest paid and the balance of the mortgage.

“It’s called constructive receipt. That’s why many people who have real estate taxes filed in December for the 2017 return. Real estate taxes, if paid by the taxpayer and not the bank, must be paid by December 31. It’s done in the year it’s expended,” he says.

When it comes to 2018 taxes, it might be the time to lean on a tax professional.

“For many people, filing a tax return is very traumatic. Next year will be the year when people will have more questions than ever,” Mackail says.

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